United States: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the United States

2019 Article IV Consultation - Press Release; Staff Report; and Statement by the Executive Director for the United States


2019 Article IV Consultation - Press Release; Staff Report; and Statement by the Executive Director for the United States

A Robust and Continuing Expansion

1. In July, the U.S. economy will achieve the longest expansion in recorded U.S. history. Since June 2009, the economy has repaired the damage wrought by the financial crisis and demonstrated extraordinary resilience, enduring both domestic policy tightening (in 2011–15 there was a cumulative 5¼ percent of GDP withdrawal of fiscal stimulus) and a range of external shocks. Unemployment has been on a downward trend for almost a decade and is now at levels not seen in 50 years. Over the course of this expansion an average of 2 million jobs per year have, on net, been created. Real wages are rising, including notably for those at the lower end of the income distribution, and productivity growth appears to be recovering. Against this backdrop, inflationary pressures remain remarkably subdued.

Figure 1.
Figure 1.

United States: An Enduring Expansion with Low Inflation

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

2. Real GDP is expected to grow at an annual rate of 2.6 percent this year, before moderating to 1.9 percent in 2020. A fiscal expansion that was put in place in 2018–19—with tax reductions and an increase in both defense and nondefense spending—has helped bring annual growth to 2.9 percent in 2018. Growth in 2019Q1 exceeded forecasts, reaching 3.1 percent (q/q, saar) with strong growth in inventory investment and net exports, as well as supportive financial conditions. Consumption and private investment growth are expected to strengthen in subsequent quarters, allowing for an increase in the growth forecast for the year as a whole, even as the temporary boost from inventories moves into reverse. However, as the effects of this fiscal impulse fade over the next few years, growth will gravitate back toward potential (of around 1¾ percent). The job market is expected to remain strong with robust job creation, steadily rising earnings, and a continuing positive response of labor force participation to the tightening labor market. Confidence about future job prospects and improving household balance sheets are expected to support household consumption (Box 1). Risks are viewed to be broadly balanced around this growth forecast. A deepening of ongoing trade disputes or an abrupt reversal of the recent supportive financial market conditions represent material risks to the U.S. economy (with concomitant negative outward spillovers). These risks are interconnected since trade policy uncertainty represents an important determinant of domestic and global financial conditions as well as of business investment decisions. On the other hand, a Congressional agreement to raise budget spending caps or a positive resolution of trade tensions could provide a supportive tailwind to activity.

Economic Forecasts


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Sources: CBO projections are from the Budget and Economic Outlook January 2019; FOMC projections are from the March 2019 Summary of Economic Projections; SPF is the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasts, April 2019; OMB is the Office of Management and Budget for the President’s FY2020 Budget.

Long-run refers to 2028.

Authorities’ Views

3. The administration expects growth to remain at or above 3 percent over the medium-term. The economy is expected to benefit from a lower tax burden (that incentivizes investments in human and physical capital), and a reduction in regulatory restrictions (particularly those that hamper business and create barriers to entry such as occupational licensing requirements), which would encourage foreign profit repatriation, and remove disadvantages for U.S. corporations operating worldwide, and an investment of up to US$2 trillion over the next decade in new infrastructure investments. In addition, the TCJA regulations are still being implemented, which means not all capital investment that results from these changes has been made. The unemployment rate is expected to remain at historically low levels for the next few years, rising gradually to around 4 percent by 2023. The potential gains from ongoing investments in apprenticeship and other work-based learning programs could prove particularly valuable as a way to increase productivity, raise wages, and support medium-term growth. Such supply-side incentives are expected to strengthen labor force participation, increase capital formation, and raise productivity. As such, the 3 percent growth rate could be achieved with inflation remaining contained at around 2 percent.

Macro-Financial Links Between Household Wealth and Consumption 1

Households consumption responds relatively little to changes in financial wealth but rising housing prices do provide support to household consumption, particularly for those at the lower end of the income distribution.

Drawing on an econometric model using household-level survey data, the marginal propensity of households to consume (MPC) out of housing, equity, and other forms of net wealth was estimated (in a panel for 1999–2017 across a sample of about 8,000 households with time fixed effects and controlling for various household-specific characteristics).

The results indicate that households raise consumption by around 4–5 cents per year for each US$1 dollar increase in their housing wealth (net of mortgage and home equity loans). The consumption response to changes in other forms of wealth—including holdings of financial assets—appears to be not statistically different from zero. Drawing on the response to changes in housing wealth across different income groups, the estimates would suggest that a persistent, broad-based 10 percent change in house prices would change aggregate consumption by around 1–1.4 percent, broadly in line with other estimates in the literature that use macro time series.


MPCs for Selected Types of Wealth

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

The propensity to consume out of housing wealth is closely linked to household characteristics. For example, working age individuals have a larger consumption response to wealth gains than do older cohorts. As such, the ongoing aging of the U.S. population would suggest the propensity to consume out of housing wealth at the aggregate level is likely to fall in the coming years.


MPC: Net Housing Wealth

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Income distribution also plays an important role. Low-income households who own their home appear to respond most to increases in housing wealth (suggesting that poorer households are more likely to be cash constrained and that constraint is eased if they can extract some part of the increase in housing wealth to finance consumption). In addition, those with an outstanding stock of credit increase consumption by more in response to rising home equity than those without credit (and this incremental effect is larger for those with lower incomes).


MPCs: Housing Wealth

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

1 See C. Caceres, “Analyzing the Effects of Financial and Housing Wealth on Consumption Using Micro Data”, IMF Working Paper 19/115, 2019.

Rising Medium-Term Financial Stability Risks

4. The financial system appears healthy but medium-term risks to financial stability are rising. U.S. banks are well capitalized and asset quality appears to be generally good. Credit remains available to both households and corporations and the cost of borrowing is relatively low. However, corporate leverage is historically high, the share of commercial loans that are non-performing is creeping up, and underwriting standards are weakening. In addition, asset valuations are rich, risk premia, term premia, and the market pricing of volatility are at low levels, and, as a result, financial conditions are extremely loose. This broad availability of relatively cheap financing is supporting near-term activity but adding to medium-term probabilities of low growth (as seen in changes in medium-term growth-at-risk estimates since the last Article IV). However, an abrupt reversal of this accommodative environment, interacting with leveraged corporate balance sheets, could create a significant downdraft to activity, investment, and job creation.


Medium-term Risks

(Growth probabilities)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Note: Growth-at-Risk estimates. Medium-term refers to three years ahead.Source: IMF staff estimates

5. Accommodative U.S. financial conditions are supportive of global growth but could create negative outward spillovers in the event of an abrupt reversal in asset prices. Such a shift could expose liquidity and solvency vulnerabilities in other countries which would be particularly problematic for sovereigns and corporates that have significant balance sheet exposures in U.S. dollars or for those countries that rely on inward capital flows to finance their current account deficits.

6. It is of concern that there has been little institutional response to counter the growing risks to medium-term financial stability. Instead, the recent tailoring of financial regulation has led to a steady easing of regulatory constraints at a late stage in the cycle (Box 2). Given the evident build-up of leverage in the system, most notably in the corporate sector, but also with rising sovereign debt and a significant stock of full-recourse student loans, it is more urgent than ever to ensure that any further changes to the financial oversight regime not only preserve, but enhance, the current risk-based approach to regulation, supervision and resolution. Risk-based capital and liquidity standards, combined with strong supervision, need to be the central tools in incentivizing financial institutions to manage well the risks they undertake, including through a robust Comprehensive Capital Analysis and Review (CCAR) process. The FSOC should continue its efforts to respond to emerging threats to financial stability and, in this work, there is scope to strengthen and more fully resource the Office of Financial Research. Also, the U.S. should maintain its engagement in developing the international financial regulatory architecture while adhering to agreed international standards.

7. There is a need to strengthen the oversight of nonbanks and to address continuing data blind spots that impede a full understanding of the nature of financial system risks, interlinkages, and interconnections. As has been highlighted in previous consultations, there are potential weaknesses in oversight arising from the absence of harmonized national standards or consolidated supervision for insurance companies. Recent proposals to limit the engagement of federal authorities in international supervisory fora could prove cumbersome for the insurance standard setting process and the development of the global capital standard. Progress has been made in money market reform but vulnerabilities—in repo markets and for money market funds— remain. There is also a need to introduce a comprehensive liquidity risk management framework for asset managers (that includes liquidity risk stress tests). Little progress has been made in reforming the housing finance system or the government sponsored enterprises. Finally, impediments to data sharing among regulatory agencies remain and there are continuing data blind spots, particularly related to the activities of nonbanks, that preclude a full understanding of the nature of financial system risks, interlinkages, and interconnections. These topics will be a focus of the ongoing Financial Sector Assessment Program (FSAP) for the United States.

Authorities’ Views

8. Overall, the risks to financial stability were assessed to be moderate. Nonetheless, the prolonged credit expansion has created potential vulnerabilities, particularly visible in the increase in nonfinancial corporate leverage. In part these higher corporate debt levels are mitigated by strong interest coverage ratios and healthy liquidity positions. Nonetheless, if there were a sudden or prolonged deterioration in business earnings there would likely be an increase in default rates with attendant downward pressures in the price of risk assets. Other salient vulnerabilities that were highlighted include the potential for a destabilizing cybersecurity event, the increased concentration of activities and exposures in central counterparties and in the tri-party repo market, and the ongoing transition away from LIBOR as a reference rate for a range of financial contracts. However, work was ongoing in all of these areas to better understand interlinkages, manage vulnerabilities, and improve risk management practices within financial institutions. U.S. regulators have also taken steps to improve the effectiveness and efficiency of financial regulations including by tailoring prudential standards for bank holding companies based on size and complexity, better integrating the CCAR process with the rules on regulatory capital buffers, and proposing simplification of the Volcker Rule requirements. There was agreement that it was critical to continue to make progress in addressing data gaps and U.S. regulators have been working with the Financial Stability Board, the Bank for International Settlements, International Organization of Securities Commissions and other international standard-setters to tackle these issues.

Figure 2.
Figure 2.

United States: Financial Sector Vulnerabilities

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Financial System Oversight Since the 2018 Article IV

Since the passage of the May 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP), U.S. financial regulators have instituted several regulatory changes and have put forward other proposals for public comment (both to implement the EGRRCP and as part of the broader effort to tailor financial regulations):

Changes in Oversight

  • Prudential standards for banks between US$50–100 billion in assets have been lowered, including for liquidity, capital, risk management requirements, and resolution plans.

  • Bank holding companies with less than US$3 billion in assets will be allowed to incur more debt and are now exempt from minimum capital requirements at the consolidated level. However, depository institutions that are part of the holding company will still be subject to minimum capital requirements.

  • The qualitative assessment in the Comprehensive Capital Analysis and Review process will be phased out.

Proposed Changes in Oversight

  • The Federal Reserve has proposed reducing the enhanced supplementary leverage ratio for GSIBs from 6 percent of assets to 3 percent of assets plus a buffer of one-half of the entity’s risk-based capital surcharge.

  • The Financial Stability Oversight Council has proposed replacing the size-based approach to designation of nonbank financial companies with an activities-based approach, with various changes to the process and criteria for making designation decisions.

  • The Federal Reserve has proposed sorting domestic banks into four categories based on the size of assets, cross-jurisdictional activity, short-term wholesale funding, nonbank assets, and off-balance sheet exposure.

    • Category I and II banks (GSIBs and non-GSIBs with more than US$750 billion in assets or with sizable cross-border activity) would see little change to their regulatory requirements.

    • Category III banks (with US$250–750 billion in assets) would face less restrictive capital and liquidity standards and would conduct company-run stress tests every other year (while remaining subject to annual supervisory stress tests).

    • Category IV banks (with US$100–250 billion in assets) would be relieved from the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements as well as company-run stress tests. This category of banks would be subject to less frequent supervisory stress tests.

  • The Federal Reserve is considering a framework for sorting foreign banks into different categories (similar to that for domestic banks) with requirements calibrated to the risks these foreign institutions pose to the U.S. financial system.

The Potential for a Rising External Imbalance

9. The current account deficit has been broadly stable over the past several years, but external imbalances are expected to grow over the medium term. Despite a very expansionary fiscal policy and output rising above potential, the current account deficit has been remarkably flat (remaining at 2¼ percent of GDP in 2018). Part of the compression of the current account has come from a shift in energy production (Box 3) that has offset a worsening in the non-energy balance. In addition, relatively low returns on U.S. bonds combined with buoyant global equity markets have led to an improvement in the net income flows in the current account. The trade and current account deficit are, however, still expected to rise over the next few years as the economy grows faster than potential and the positive output gap widens. The 2018 external position is judged to be moderately weaker than implied by medium-term fundamentals and desirable policies and the real exchange rate remains somewhat overvalued (see Annex I). The persistent current account deficits are expected to lead to the net international investment position becoming increasingly negative, approaching -50 percent of GDP by 2025.


Current Account Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: BEA

10. Addressing these external imbalances will need to involve fiscal adjustment, a continued improvement in the oil balance, and supply side reforms that improve productivity and competitiveness. Efforts to contain bilateral trade deficits through tariff measures will be unable to impact the U.S. current account and will be damaging to both U.S. and global macroeconomic outturns (see April 2019 World Economic Outlook and Box 4).

Authorities’ Views

11. There was agreement that the recent rise in the fiscal deficit was putting upward pressure on the U.S. current account deficit. However, the administration’s policies to take advantage of the U.S. abundant energy resources were expected to continue putting a structural downward pressure on the current account deficit (the U.S. is already a net exporter of natural gas and is expected to become a net exporter of energy by 2020). Officials highlighted addressing excess savings or low investment in other systemic economies would more productively address global current account imbalances while strengthening global growth. Officials agreed that trade restrictions, standing alone, would not address the U.S. external imbalance. However, insofar as these restrictions were able to create the conditions whereby other countries address their distortions and unfair trade practices, they would eventually lead to more balanced trade and a reduction in global imbalances. The worsening of the U.S. net international investment position was not viewed as a significant concern, given the dollar’s status as a reserve currency.

Recent Developments in the U.S. Energy Sector1

The U.S. has now become the world’s largest producer of oil and natural gas and is expected to become a net exporter of petroleum products by 2021.

The past decade has seen a rapid transformation in the U.S. energy industry driven by shale oil and gas production. The initial widespread adoption of hydraulic fracturing was associated with a surge in oil and gas capital expenditures causing the U.S. share of global oil and natural gas liquids production to rise (from 11 percent in 2010 to 20 percent in 2018). The sector’s rapid expansion in upstream production, downstream demand for inputs, and product transportation have been a boon to manufacturing and employment in many parts of the country.


Oil and Gas CAPEX

(bn dollars, LHS)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Note: 2019 values are estimates by the sourcesSource: Bloomberg, EIA.

Since the oil price shock of 2014–15, the sector has become leaner, more capital efficient, and is now, for the most part, cashflow positive. The sector appeared to weather well the 2018 price decline and subsequent volatility. As technology improves and drilling becomes more targeted, new wells are achieving substantially higher output. The short production cycles of shale wells (they can often be drilled and begin producing in less than 45 days) as well as the ability to leave wells uncompleted until prices become more favorable, implies a high elasticity of both production and investment to changes in world prices. This means that the U.S. oil and gas sector can serve as a global shock absorber that can dampen price volatility, creating positive outward spillovers for the global economy.


U.S. Oil rigs


Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Sources: Baker Hughes, Haver Analytics

Assuming WTI prices remain above US$60 per barrel, industry experts forecast U.S. oil production to reach 16 million barrels per day by 2030 (i.e. around 2 million barrels per day above the EIA’s current baseline scenario). The Permian Basin in West Texas and New Mexico is expected to drive the bulk of production increases given the field’s proximity to refining capacity and ports on the Gulf Coast. By 2020, the U.S. will become a net energy exporter which will be an important force in reducing the U.S. current account deficit. Even now, as a net energy importer, it is empirically ambiguous whether a change in oil prices has a positive or negative impact on U.S. activity (given the countervailing effects of oil prices on consumption and investment behavior).

1 Authored by Peter Williams.

Outward Spillovers of Trade Tensions1

Estimates from a detailed sectoral model show that ongoing trade tensions with China are likely to create an important drag on specific U.S. industries and states. These economic losses could potentially be further amplified by either short-run adjustment costs, by long-run effects on labor and capital formation, or through heightened policy uncertainty. Outward spillovers from higher tariffs on Chinese imports can be large, depending on the industrial structure of trading partners.

A multi-sector trade model calibrated to 165 countries is used to examine the effects of changes to the U.S. trading relationships with China. The model captures medium-term sectoral and global value chain disruptions (although it does not capture medium-term effects on the stock of capital and size of the labor force).

A U.S.-China trade deal could represent an important step forward for the global system if it is able to multilaterally eliminate some of the existing trade restrictions and trade-distorting policies (e.g. non-tariff barriers or disincentives to investment like weak intellectual property protection or required transfers of technology). However, a managed trade deal that focuses on reducing the bilateral trade deficit could create new structural rigidities. To compare sectoral and macro outcomes, three scenarios are analyzed:

  • An intensification of trade tensions with China that increases bilateral tariffs by 25 percentage points.

  • A trade deal where China puts in place administrative restraints on its exports to the U.S.

  • A trade deal where China agrees to larger purchases of U.S. goods (mainly primary sector products and aircrafts).

Higher tariffs and export restraints both reduce U.S. and China’s GDP, while an agreement for China to purchase more U.S. goods is supportive of U.S. activity but reduces Chinese income. The negative effects arise because protected sectors in each country are unable to expand sufficiently to offset the negative impact that tariff distortions have on other parts of the economy. Broader macroeconomic effects on investment and labor supply, that are not considered here, would likely amplify these effects (for example, as described in the April 2019 WEO, a broad-based 25 percent tariff lowers GDP by around 0.5 percent for both countries).


Real GDP Impact on U.S. and Selected Trading Partners from Sectoral Trade Model

(percent change)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

The three scenarios are a headwind to the Chinese economy but countries with large direct trade exposure to the U.S. (e.g. Mexico and Canada) could gain from trade diversion effects (although they may lose from other effects not considered here). For some, there could be sizable spillover effects as the shifts in U.S.-China trade feed through global supply chains.


Impact of Trade Deal that Entails Larger Purchases of U.S. Goods by China

(value added; percent change)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Even though aggregate effects are relatively small, the sectoral and regional effects in the U.S. can be large. The regional implications are closely linked to the sectoral specialization of each state. For example, those with a large agriculture or energy presence benefit from an increase in China purchases of U.S. goods but most other states face a modest loss.

The distributional effects can vary greatly across different trade scenarios. For example, higher tariffs between the U.S. and China would disproportionately be borne by poorer states (creating a consequent increase in overall poverty). By contrast, increased Chinese purchases of U.S. goods would benefit those states with lower average incomes and a higher proportion of lower earners.

1 See C. Caceres, D. Cerdeiro, and R. Mano, “Trade Wars and Trade Deals: Estimated Effects Using a Multi-Sector Model”, IMF Working Paper, 2019. Broadly similar effects are found in Chapter 4, April 2019 World Economic Outlook.

Troubling Social Outcomes

12. Real per capita GDP is at an all-time high, almost 10 percent above the pre-financial crisis peak, but metrics of welfare have not matched those income gains. Most notably, after rising steadily (from 70 years in 1960 to almost 79 years in 2017) Americans’ life expectancy has declined over the past three years and is well below that of other G7 countries (despite having been near the G7 median in the 1980s). Cancer and heart disease remain the leading causes of death even though the mortality rate for both diseases has been declining. Rising suicide rates and, particularly, deaths linked to drug overdose (Box 5) have been important contributors to diminished longevity. The rising cost of healthcare—which, over the past 20 years, has increased by 1.4 percent per year faster than median incomes and leaves the U.S. with the highest per capita healthcare costs among the OECD countries—has reduced access and been a headwind to improving health and longevity outcomes. As one indication of the implications of the rising cost burden, according to a recent Gallup survey, 29 percent of Americans have decided not to seek medical treatment because of high costs.


G7 Life Expectancy at Birth


Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Sources: OECD and World Bank

13. On the positive side, it is important to recognize that less than 9 percent of the population are now without health insurance, half the rate of uninsured relative to that of a decade ago. This increase in coverage has been a result of the Affordable Care Act (ACA) raising income limits for Medicaid, a greater share of the population becoming eligible for Medicare (as the population ages), greater use of non-employer provided insurance (largely purchased through ACA health insurance exchanges), and the expansion of the Children’s Health Insurance Program (which now covers 9.5 million children and has measurably improved health, labor market, and education outcomes for participants).

14. Despite the current favorable macroeconomic and labor market conditions, poverty rates remain close to levels that prevailed immediately before the financial crisis. According to the supplemental poverty measure (which measures poverty after accounting for the impact of government programs), almost 45 million Americans (or 13.9 percent of the population) are living in poverty with a little under one-half of adults that are below the poverty line working either full or part-time. This includes one-in-six American children, 27 percent of female-headed households, and more than one-fifth of blacks and Hispanics. This population is particularly reliant on federal and state-administered social programs that provide nutrition, healthcare, education, and housing.

The Social and Macroeconomic Toll of Opioid Addiction1

Over the past 15 years the U.S. has seen a worrisome rise in opioid usage, addiction, and deaths, particularly in the Northeast, Midwest, and Appalachia. A study by the Center for Disease Control estimated the economic cost in 2013 at US$78.5 billion while the Council of Economic Advisors estimates an economic cost of US$504 billion in 2015. There is a broad consensus that the economic costs are rising over time.


Overdose Mortality Rates

(Aging-adjusted deaths per 100,000)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: Kaiser Family Foundation

This crisis is just one aspect of what has been termed the rise in “deaths of despair” arising from diminished economic opportunities, a growing sense of hopelessness, rising substance abuse, and, increasingly, suicide (see Case and Deaton, 2017).

An assessment by the Centers for Disease Control (CDC) indicates that the current opioid epidemic was catalyzed by a widespread expansion of doctors’ prescribing of non-morphine opioids for pain management in the late 1990s. During the 2000s, a steady increase in addiction to those pain medications led first to rising fatalities from prescribed opioids and, since 2010, a surge in heroin usage. By 2016, deaths from heroin, prescription opioids, and synthetic opioids were roughly at the same level. Since 2016, though, the wide availability of potent synthetic opioids (such as fentanyl) has led them to now become the leading source of U.S. overdose deaths.


The Rise of Opioid Overdoses

(Deaths per 100,000)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: Centers for Disease Control* Include prescription drugs

Most public health interventions have, so far, been undertaken at the state and local level but with Federal support (e.g. through State Opioid Response Grants to states and other programs of the Substance Abuse and Mental Health Services Administration, National Institutes for Health, and the CDC). Programs typically combine efforts to equip emergency services with anti-overdose medication, providing medication-assisted treatment (often funded through Medicaid), improving pain management practices (to restrain the prescribing of opioids), expanding prescription drug monitoring programs, and undertaking education campaigns targeted at both the medical community and the general public.

There are some preliminary signs these efforts are starting to bear fruit. In 2017, seventeen U.S. states saw a decline in fatal drug overdoses (with the steepest falls occurring in Massachusetts and New Hampshire). Among the subset of states that are collecting data under the CDC’s Enhanced State Opioid Overdose Surveillance program, there has been a 15 percent decline in opioid overdoses since 2016.

1 Authored by Peter Williams.
Figure 3.
Figure 3.

United States: The Nature of Poverty in the United States

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

15. The distribution of income is increasingly polarized. Although household incomes have been rising since 2014, the current level of the median household income is only 2.2 percent higher in real terms than it was at the end of the 1990s (this is despite real per capita GDP being 23 percent higher over the same period). Furthermore, as highlighted in past Article IV consultations, a growing share of the population is earning less than one-half of the median income.

Figure 4.
Figure 4.

United States: A Decades-Long Rise in Income and Wealth Inequality

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

16. Socioeconomic mobility has steadily eroded. Today, American children are considerably less likely than their parents to move up the economic ladder, and the probability that they earn more than their parents has seen a secular decline (from almost 90 percent, for those born in the 1940s, to 50 percent for the current cohort of young adults). This decline in income mobility has been broad based but with larger declines for the middle class. Americans have also become less geographically mobile, with only 10 percent of the population moving in 2018. This has exacerbated regional disparities and worked against a more efficient allocation of labor.

Figure 5.
Figure 5.

United States: A Secular Decline in Socioeconomic Mobility

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

17. By many measures, the U.S. has some of the most prominent educational establishments in the world and devotes significant resources to investing in tertiary education (around 3 percent of GDP, almost twice that of Germany and Japan). There remains a sizable wage premium to investments in tertiary education: a bachelor’s degree garners 60–80 percent more income relative to just having a high school degree which is suggestive of the productivity gains associated with these investments in human capital. However, according to recent research, this wage premium has been declining for successive cohorts and, given the rising costs of tertiary education and significant variability in the quality of undergraduate programs, the lifetime wealth premium from completing college is now close to zero for a large share of the population.

18. The high level of spending on education has not translated into a significant improvement in education outcomes relative to OECD peers. Part of the reason has been that the real cost of education (particularly at the tertiary level) has been rising rapidly (for example, over the past decade, college tuition (net of financial aid) has risen by around 4 percent per year). This, in turn, has led to a rapid rise in student debt (average student debt now totals US$37,172 per recent college graduate and 2.2 million Americans have student debt in excess of US$100,000). A second shortcoming is the high noncompletion rate. Only 60 percent of enrollees in four-year colleges graduate within 6 years resulting in less than one-half of 25–34 year-olds having an undergraduate degree.

Figure 6.
Figure 6.

United States: Education Indicators

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

19. The seeds of these disappointing tertiary education outturns are complex but are, in part, rooted in a range of inequalities in the PK-12 education system. Most U.S. states spend less today on K-12 education than they did prior to the financial crisis and, since education is locally funded, there are wide discrepancies in per-student funding across localities and very uneven access to publicly-funded pre-K. It is not surprising then that, on average, U.S. high school students consistently score below most G-7 countries in internationally comparable math and reading tests.

20. The troubling social outcomes described above are having negative effects at the macroeconomic level. For example:

  • Those living in poverty have a narrower range of opportunities and resources, leading to lower labor force participation, higher rates of incarceration, worse education and health outcomes, and lower productivity. This is particularly pernicious for children that are growing up below the poverty line.

  • The high cost of healthcare and lack of universal coverage diminish human capital, reduce working lives, and create important private and public costs that are increasingly weighing on the fiscal position.

  • Variable quality, high costs, and unequal public funding of K-12 and college education serve to perpetuate inequalities and erode the supply of productive, skilled labor.

  • The polarization in wealth and income suppresses aggregate demand (particularly household consumption), reduces social mobility, and worsens the inequality of economic opportunities (particularly for the young).

There are also important interconnections between these various social outcomes as well as a two-way feedback between these different dimensions of social welfare and macroeconomic outturns.

21. Addressing the growing divergences between the aggregate fortunes of the real economy and the standard of living for the bulk of the U.S. population is complex and will require action on many fronts. Such policies include:

Providing Family-Friendly Benefits

  • Requiring employers to provide paid family leave.

  • Providing means-tested assistance to families to help defray child and dependent care expenses.

Supporting the Poor

  • Expanding the eligibility for, and increasing the generosity of, the Earned Income Tax Credit (EITC) to support lower income households and incentivize work. This should include more generous treatment for workers without dependents, those under 25, and older workers that are not yet eligible for social security.

  • To lessen the risk that an expanded EITC leads to a decline in pre-tax wages at the bottom of the income distribution, changes in the EITC should be combined with an increase in the federal minimum wage.

  • Upgrading federal and state social assistance to simplify the multitude of programs, increase the generosity of direct transfer programs, avoid “cliffs” in the phase out of social benefits as disposable income rises (Box 6), and better target federal payments to program outcomes.

Social Assistance Programs

Social programs currently lift around 45 million Americans out of poverty (see Census, 2018). The Supplemental Nutrition Assistance Program (SNAP), refundable tax credits—notably the Earned Income Tax Credit, the refundable portion of the Child Tax Credit, and health insurance premium tax credits (for lower income families that purchase health insurance through the Health Insurance Marketplace)—and Supplemental Security Income (for the elderly, blind and disabled) are the main programs in place to alleviate poverty. Poor children benefit particularly from refundable tax credits and the nutrition benefit programs (combined, the direct cost of these two programs is less than 1 percent of GDP).


Number of Americans Lifted Out of Poverty: 2017

(Million people)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: Census, CPS, 2017–2018 Annual Social and Economic Supplements.

Outlays for Payments to All Individuals: 2018

(Federal expenditures in percent of GDP)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: Office of Management and Budget (2019).

While eligibility varies by social program and by state, for most social assistance there is a phase out as personal income rises and benefits are sometimes cut abruptly at specific income thresholds resulting in “cliffs” (see Steuerle, 2012 for a graphical illustration of eligibility cliffs). Programs are typically not coordinated and benefits across multiple programs are sometimes eliminated simultaneously at certain levels of income. This phase-out typically occurs before a household reaches levels of income that would allow them to be fully self-sufficient. This could mean that increased earnings can push a household back below the poverty line (because of a loss of their social assistance benefits).

A smoother phase-out of social assistance programs as income rises—in the same way as the EITC currently does—would help improve social outcomes. Income eligibility limits for each individual program could be extended to higher levels of income and, in addition to a gradual phase-out, there could be a greater coordination in eligibility across programs (to harmonize eligibility thresholds and prevent several programs expiring around similar levels of income). Further, given the importance of assistance programs in addressing poverty for children, consideration could be given to increasing the generosity of benefits that are most incident on the young (such as SNAP, the refundable child tax credit, and support to child care services) to better support the challenges facing single-parent households with incomes at or close to the poverty line.

Expanding Healthcare Coverage and Tempering Healthcare Costs

  • Protecting the gains in health care coverage that have been achieved since the financial crisis, particularly for those at the lower end of the income distribution.

  • Drawing on existing pilot programs, and the deployment of new technologies, to provide incentives to increase efficiency and improve pricing transparency by healthcare providers. The goals should be to help improve market discipline, reduce pricing variability, and ultimately contain inflation in healthcare services.

  • Capitalizing on the range of experiences at the state and local level to deploy, and fund, effective programs (including medication assisted treatments) to counter the upswing in opioid addiction and related deaths.

  • Assessing the scope to apply antitrust or other solutions to cases where the market concentration of health providers or insurers has increased and there are unreasonable restraints of trade and/or where premiums for non-group policies have been rising rapidly.

Improving Education Outcomes

  • Better prioritizing spending on education to provide greater resources for early childhood education and for universal pre-K (both of which have been linked to higher educational attainment).

  • Designing Federal programs to provide greater support for science, technology, engineering and mathematics programs.

  • Redesigning the funding model for public schools to reduce funding differentials across districts and to provide more resources to schools with a higher concentration of students from low-income households.

  • Expanding apprenticeship and vocational programs to offer attractive, non-college career paths to workers of all ages.

  • Increasing the focus on preparing students for college and, once those students are enrolled, expanding programs that foster retention and actively advise students (including to raise awareness of how to manage the financial dimensions of their college investment).

22. Some of these measures will imply higher fiscal costs that will need to be offset both by tackling entitlement spending and raising revenues (see below). However, addressing these troubling social outcomes will help strengthen human capital, increase labor force participation, boost productivity, support aggregate demand, and raise medium-term growth and job creation.

Authorities’ Views

23. The administration noted any solution to poverty and material hardship needs to be couched in helping low-income households become more self-sufficient by bringing workers off the sidelines and into productive employment. This can be achieved by strengthening work requirements in a range of welfare programs (including SNAP and Medicaid) and increasing means-tested child care assistance. In this regard, the substantial expansion of the Child Tax Credit as part of the Tax Cut and Jobs Act has helped support lower income parents and increased their incentive to work. Significant gains could be made in K-12 education outturns by allowing families greater choice over where they attend school and allowing public education funding to follow the student to whichever school environment best fits their needs. The administration is committed to expanding apprenticeship initiatives to make such work-and-learn programs a viable path to a prosperous career. Finally, decisively tackling opioid abuse continues to be a priority for the administration through increased access to treatment and recovery services, prescription drug monitoring programs, and cracking down on illegal drug supplies.

The U.S. Fiscal Position is Unsustainable

24. The structural primary deficit of the federal government has steadily deteriorated since the beginning of the current administration. Policy changes were put in place for 2018–19 that increased both defense and nondefense spending as well as significantly reduced taxes on both households and corporates. This fiscal expansion has supported economic activity and allowed the U.S. to achieve close to 3 percent growth in 2018 at a time when the global economic expansion was weakening. However, the shift in policy has also increased the debt-to-GDP ratio (to 78 percent of GDP for the federal government and 107 percent of GDP for the general government). Under current policies, the public debt burden is expected to continue its upward path throughout the medium-term, particularly as aging related spending rises. Although the U.S. is judged to have some fiscal space, it should not be using it at this stage in the cycle. The demand stimulus from U.S. fiscal policy is having positive demand spillovers to other countries for the time-being but is adding to medium-term risks (notably, the reversal in fiscal impulse planned for 2020 has the potential to create adverse effects for overseas corporates, households and sovereigns).

Federal Budget Deficit and Impact of Recent Fiscal Policy Measures, FY2017–19

(percent of GDP)

article image

CBO, The Budget and Economic Outlook: 2018 to 2028 (April 2018) and IMF staff calculations

25. The estimated fiscal cost in 2018–2027 of the Tax Cuts and Jobs Act has risen from US$1.5 trillion (at the time of approval) to US$1.9 trillion (or 10 percent of current GDP) in most recent estimates. Despite this increased cost, the evidence so far suggests that businesses have either saved or redistributed to shareholders much of the tax windfall. There is less evidence the tax overhaul has led companies to increase outlays on physical capital and R&D. Indeed, the rise in investment that occurred in 2018 is largely explained by the increase in aggregate demand arising from the contemporaneous fiscal stimulus (rather than from a supply side response to a lower effective corporate tax rate). Although it is too soon after the entry into force of the tax overhaul to come to firm conclusions, one possible explanation for this tepid response of investment to a lower corporate tax burden could be a result of the higher market power of U.S. corporations when compared to previous tax cut episodes (Box 7).


Impact of Tax Cuts and Jobs Act on 2018 Growth: Actual vs. Predicted Based on Existing Empirical Estimates

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: Mertens (2018) and IMF staff calculations. Actual denotes real outcome compared with Fall 2017 IMF staff forecast, which assumes unchanged U.S. fiscal policies.

26. There is a menu of policy options to address the unsustainable U.S. fiscal position. Under current policies, the federal deficit will remain stuck at high levels (an average primary balance of around –2 percent of GDP over the next decade) and the federal debt will steadily rise (to 88 percent of GDP by 2030). This is not a sustainable policy path. Gradually increasing the primary fiscal balance of the federal government to around 1¾ percent of GDP (1 percent of GDP primary surplus for the general government) would serve to put the debt-to-GDP ratio on a downward path over the medium term. Measures that could achieve this sizeable adjustment could include:

  • Raising the income ceiling for social security contributions.

  • Indexing social security benefits to chained inflation.

  • Front-loading the planned increase in the retirement age.

  • Containing healthcare cost inflation through technological solutions that increase efficiency, encourage greater cost sharing with beneficiaries, and change the mechanisms for remunerating healthcare providers.

  • Increasing the federal revenue-GDP ratio by putting in place a broad-based carbon tax, a federal consumption tax, and a higher federal gas tax.


Federal Debt Held by the Public

(percent of GDP, fiscal year)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Such a set of policies would both allow the public debt-to-GDP ratio to fall and create fiscal space to support low- and middle-income families, address social inequalities and improve welfare, expand public investments in human and physical capital, and increase medium-term growth, productivity, and job creation.

27. It is worth noting that other supply-side measures that sustainably raise potential growth would reduce the size of the policy adjustment that is needed to achieve fiscal sustainability. For example, legislating a skills-based immigration reform (a plan has recently been proposed by the administration) could increase both productivity and the size of the labor force as well as lessen the pressures from aging, with beneficial consequences for the debt-GDP dynamics. Other long-standing recommendations for raising potential output include upgrading public infrastructure, simplifying and harmonizing regulations across states, supporting low- and middle-income households, and improving education outcomes (see 2017 Article IV for a summary).

The Impact of the Corporate Income Tax Cut 1

U.S. business investment grew strongly in 2018. The overriding factor supporting this higher investment has been the overall strength in aggregate demand (in part driven by the large fiscal stimulus enacted in 2017–18). The reduction in the corporate cost of capital associated with the Tax Cuts and Jobs Act seems to have had a relatively minor supply-side impact on capital formation.

In 2018, U.S. business investment grew 3½ percent faster than had been anticipated prior to the enactment of the 2017 Tax Cuts and Jobs Act (TCJA) and the passage of the 2018 Bipartisan Budget Act (BBA). This increase is consistent with a forward-looking accelerator model in which investment responds to expectations of future overall demand (as measured by private-sector forecasts of growth in the non-investment part of output). This would imply that factors that boosted aggregate demand—including the rise in disposable household income from the TCJA and the government spending increase from the BBA—were the main forces supporting higher investment. Other factors, such as reductions in the cost of capital from the TCJA business tax provisions, appear to have played a more minor role.


Real Business Investment in Equipment and Intellectual Property

(log index)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

The impact of the tax changes on investment appear to be corroborated by other data:

  • Around 20 percent of the increase in corporate cash balances for S&P500 firms has been used for capital and R&D spending. The remainder has supported share buybacks, dividend payouts, and other asset-liability planning and balance sheet adjustments.

  • Business surveys suggest that only 10–25 percent of firms chose to bring forward or increase investment as a result of the 2017 changes in the tax code


Change in the Use of Cash Since 2017

(percent of total; S&P Global)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

What could explain this relatively muted response of investment to a lowering in the effective tax rate? Simulation results from a dynamic general equilibrium model suggest that the elasticity of investment to tax changes could have declined over the past 30 years due to the rise in corporate market power (as documented in Diez, Leigh and Tambunlertchai 2018 and IMF 2019). This is also borne out in firm-level data where the impact of tax changes on investment and employment in 2018 has been significantly smaller for those firms with higher markups when compared with those firms that price closer to marginal cost.


Macroeconomic Impact of 1% of GDP Corporate Income Tax Cut

(Percent; impact after10 years)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: Global Integrated Monetary and Fiscal (GIMF) model simulations
1 See E. Kopp, D. Leigh, S. Mursula, and S. Tambunlertchai, “U.S. Investment since the Tax Cuts and Jobs Act of 2017,” IMF Working Paper 19/120, 2019.

28. The prolonged government shutdown earlier this year demonstrates, once again, the dysfunction inherent in the U.S. budgetary process. Such policy-induced uncertainty is not good for the U.S. economy and has negative outward spillovers for the rest of the global economy. It will be important, therefore, to find institutional mechanisms to avoid such self-inflicted wounds that are created by political brinkmanship. Solutions that should be considered include:

  • Permanently shifting to a budget cycle where annual spending levels are agreed for a two-year period (helping to divorce budget decisions from the electoral calendar).

  • Introduce provisions to automatically continue funding government functions, perhaps at reduced levels, if appropriations agreements cannot be met before spending authority expires.

  • Contemplating new legislative approaches that trigger automatic revenue or spending adjustments in the event that congress-approved fiscal targets are breached.

  • Replacing the existing debt ceiling with a bipartisan agreement on a clear, simple medium-term fiscal objective (that takes an integrated view of all budget functions and has explicit numerical goals for both debt and deficit). Failing such a broader agreement, it would be a step forward if legislation could, at least, be designed to automatically adjust the debt ceiling once an agreement is struck on appropriations.

Authorities’ Views

29. The President’s Budget argues for reaching a federal primary surplus of 1.8 percent of GDP by 2029 without increases in federal taxes. Rather, this deficit reduction would be achieved through a reprioritization of Federal spending. and the Administration’s “two-penny” plan budget proposal reduces non-defense discretionary funding by two percent per year from 2021 to 2029 and increases funding for border security, national defense, law enforcement, and programs to tackle the opioid epidemic. The administration also saw improving U.S. infrastructure as an important goal and has proposed providing up to US$200 billion in federal funding to incentivize state, local and private providers to invest in up to US$2 trillion in infrastructure projects over the course of the next 10 years. The Administration supports a clean and prompt increase to the debt ceiling. However, ultimately such changes were outside the authority of the Executive and would have to be legislated by Congress. Finally, as a broader reform of legal immigration, the administration has proposed increasing the number of legal immigrants that are selected based on skill or merit from the current 12 percent to 57 percent of total legal immigrants.

Monetary Normalization—Rest Stop or End of the Line?

30. After raising the federal funds rate in December, Federal Reserve officials and the FOMC markedly changed their communications in January. At the time of the December meeting, the median of Fed Board members and the regional Fed presidents envisaged 75 basis points increase in the federal funds rate in 2019–20. However, by early January, Chair Powell expressed concerns over the global outlook and indicated the Fed would be “listening sensitively to the message that markets are sending”, “patient as we watch to see how the economy evolves”, and “prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy”. This had an immediate effect on improving market sentiment and lessening risk aversion. These forces were further fueled at the January FOMC meeting when the forward bias for further gradual increases in policy rates and the assessment that risks to the outlook were balanced were both removed from the statement. Finally, at the March FOMC meeting, the Fed reaffirmed its guidance and indicated that most participants envisaged no further policy rate increases in 2019.

31. Over the past few months, inflation rates have again declined as a result of large, downward shifts in specific components of the PCE index. On the one hand, it can be argued that such temporary drags on core and headline inflation should be looked through since they will wash out of price statistics over time. However, looking over the past decade or more in the U.S., such idiosyncratic and temporary price changes have represented a persistent headwind to inflation outturns, keeping core PCE inflation persistently below other measures of underlying inflation (such as trimmed mean or median PCE).


Distribution of Deviations Between Core and Median PCE

(percentage points; q/q saar)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: IMF staff calculations. Distribution of quarterly changes in core PCE relative to median PCE inflation.

PCE Inflation

(percent, q/q saar)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Sources: BEA and IMF staff calculations.

32. In deciding future movements in the federal funds rate, the Fed should carefully weigh the balance of potential risks to employment and inflation (Box 8). On the one hand, further increases in policy rates at this stage run the risk of triggering an abrupt tightening of financial conditions (through a stronger dollar, lower equity prices, and a repricing of risk premia) which would damage growth and employment prospects. However, these considerations need to be balanced against the risk that wage or price inflation will accelerate as capacity constraints become more binding, requiring policy rates to rise at a faster pace than is currently anticipated (which would also potentially create future market volatility and put downward pressure on activity and employment).

33. On balance, further increases in the policy rate should be deferred until there are greater signs of wage or price inflation than are currently evident. Falling inflation, firmly anchored expectations, strong Fed credibility, evidence of a flat trade-off between inflation and slack and continued uncertainties around the global outlook and where the neutral interest rate is all argue in favor of a pause to further changes in monetary policy. Such a pause will give policymakers time to gauge the balance of risks to both inflation and employment outcomes and to build a clearer picture of whether further adjustments in the federal funds rate are warranted. It is also possible that continued policy accommodation could generate lasting, positive supply side effects as scarce labor resources are allocated more efficiently and as labor force participation increases (Box 9). The challenge in setting monetary policy will be to judge when this margin of supply side improvement may be exhausted. Furthermore, this pause in policy rate increases will have positive outward spillovers to other countries. As discussed in the October 2013 WEO, lowering the path for the federal funds rate by 25 basis points has positive outward spillovers to activity in other countries, increasing industrial production for the average country by around 0.2 percent. Historically, the largest effects are felt in Latin America and Asia.

34. Given the likelihood and severity of downside risks to inflation and the asymmetries posed by the effective lower bound, the path for policy rates should accept some temporary overshooting of the Federal Reserve’s inflation goal. This would allow inflation to approach the FOMC’s 2 percent medium-term target from above. Given the apparent lack of inflation momentum, and barring an unanticipated steepening in the trade-off between slack and inflation, achieving such an overshoot will likely require leaving the federal funds rate at current levels for at least the next few FOMC meetings. Under staff’s baseline forecast, the U.S. economy is expected to continue growing faster than potential both this year and next, the policy rate is forecast to resume its gradual upward path later in 2019 or during 2020, and both core and headline PCE inflation modestly overshoot 2 percent in 2020.

35. The Fed’s continued adherence to the principles of data dependence and clear, forward-looking communication will be vital to avoid creating volatility in financial conditions or negative spillovers to the rest of the world. To assist in this communication effort, the Fed could consider publishing a quarterly monetary policy report that details a central economic scenario, that is endorsed by the FOMC, and is accompanied by a quantification of how FOMC members see the distribution of risks around that scenario.

Salient Risks to Growth and Inflation

Risks to inflation. Over the past decade, the U.S. has maintained very well anchored inflation expectations. The output gap exerted downward pressure on inflation for much of that period and core PCE inflation struggled to rise to the Federal Reserve’s 2 percent medium-term target. This past history, and the recent flow of data, suggest there are continued downward risks around staffs forecast of PCE inflation (likely either due to inflation expectations of prices setters being below 2 percent or because of headwinds from repeated negative relative price changes, perhaps associated with secular changes in technology).


Phillips Curve since the Crisis


Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: BEA, BLS, and staff calculations

Trade-related risks. Ongoing trade tensions emanating from the U.S. are adversely impacting global trade and production (both directly and through increased policy uncertainty and the impact on confidence and on financial conditions). Estimates suggest that investment falls by 1 -1¼ percent in response to a one-standard deviation shock to policy uncertainty. However, this is a two-sided risk. A swift resolution of ongoing trade tensions and approval of the U.S.-Mexico-Canada trade agreement could represent an upside risk to the outlook.


Policy Uncertainty Index

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

The policy mix. The expansionary fiscal policy that is current in place is creating domestic imbalances, particularly since it comes at a time when the economy is already operating above potential. Under current policies, the fiscal stimulus is expected to reverse in 2020 which could lead to a sharper-than-expected deceleration over the next two years.

Macro-financial risks. Nonfinancial corporates have seen a significant increase in indebtedness in recent years and lower-rated entities have had open access to debt financing. The rise in leveraged lending is one symptom of this overall weakening of lending standards. The combination of leverage, fragile balance sheets, a slowing economy, and potential for financial market volatility and a tightening of financial conditions (as was evident in late-2018) could create adverse macro-financial feedback loops, amplifying the impact from an expected slowing of growth, and increasing downside risks to the outlook.

Hysteresis and the Scope for Continued Monetary Accommodation1

Demand-driven labor market expansions appear to have persistent effects on both forecasts and outcomes, suggesting that maintaining an accommodative policy stance, even at a late stage in the economic expansion, may have positive long-run, supply-side benefits.

Conventional wisdom suggests that labor market booms typically have transitory effects. However, a number of studies since the global financial crisis find that cyclical fluctuations have longer-term effects, suggesting hysteresis.1

In line with these studies, new evidence from a panel of advanced economies over the last 30 years shows that professional forecasters tend to revise upward their outlook for longer-term employment and labor force participation in response to positive revisions to current-period employment. Specifically, the analysis isolates positive demand-side shocks (where unemployment unexpectedly falls and inflation unexpectedly rises) and finds that, during such episodes, forecasters increase not only their near-term forecasts but also raise their outlook for employment and labor force participation over a longer horizon (revising downward their medium-term forecast of the unemployment rate). The magnitudes of these revisions are not small. For a 1 percent surprise in current-period employment, the 5-year ahead forecast for employment rises by 1.7 percent, with a 1.3 percent upward revision in labor force participation.


Estimated Responses of Forecasts to a 1 Percent Demand-Driven Employment Expansion

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Furthermore, these medium-term forecasts appear to neither over- nor under-estimate realized labor market outcomes. As such, this combination of (i) persistence in forecast revisions and (ii) that forecasts are unbiased estimates of future outcomes suggests that positive demand shocks can generate long-lasting (supply-side) effects in labor markets (i.e., that there is “positive hysteresis”). Such longer-run effects could arise, as Yellen (2016), Blanchard (2018), and Powell (2018) discuss, as a result of being able to bring discouraged workers back into the labor force, encouraging more efficiency-enhancing job switches as labor markets tighten, enhancing human capital through on-the-job training, and prompting more investment into physical capital and research and development.

1 See J. Bluedorn and D. Leigh,” Hysteresis in Labor Markets? Evidence from Professional Long-Term Forecasts” IMF Working Paper 19/114, 2019.2 See Ball 2009 and 2014; Erceg and Levin 2014; Blanchard, Cerutti, and Summers 2015; Martin, Munyan, and Wilson 2015; Fatás and Summers 2018; Yagan 2018; and others.

36. With the federal funds rate now moving above the rate of interest on excess reserves, the Fed’s announcement to end its balance sheet normalization by the end of this year appears warranted. Understanding changes in the demand for reserves and adjusting supply to ensure the fed funds rate is aligned within the target may become more challenging as balance sheet normalization progresses. Barring a significant negative shock (i.e. one where sufficiently accommodative monetary conditions cannot be achieved through reductions in the policy rate), the adjustments to the balance sheet should proceed as outlined in the March principles. It will be important to communicate clearly that decisions on the size of the Fed’s balance sheet are technical in nature and not to be interpreted as a change in the monetary policy stance.

37. The Federal Reserve’s ongoing review of its monetary policy strategy, tools and communications is a timely effort to assess how the Fed can best continue to meet its dual mandate. There is a growing consensus that the decline in various estimates of the neutral interest rate in recent decades has increased the likelihood that monetary policy will be constrained by the effective lower bound in future recessions. In addition, despite the Fed pursuing a symmetric target, personal consumption expenditures inflation has been stubbornly below the Fed’s medium-term target for much of the past decade. The Fed’s ongoing assessment of alternative strategies for meeting its dual mandate will, therefore, be invaluable in helping to inform the formulation of policies and to ensure the continuing credibility of the Fed’s clear commitment to its mandate of maximum employment and stable prices.


Estimates of the Long-run Real Neutral Rate


Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Sources: Federal Reserve Board of Governors and Federal Reserve Bank of New York

38. Beyond possible changes to the monetary policy strategy, providing greater clarity and a more holistic picture of the expected evolution of the operating framework for monetary policy would be valuable. The Federal Reserve has provided significant information about its expectations for the size of its balance sheet over the coming years. However, less is known about the broader future operating framework. The current “floor” system appears to be working well but has been associated with periodic spikes in short-term money market rates. A standing repo facility may, therefore, be helpful in capping spikes in money market rates during episodes where there is a temporary higher demand for reserves (e.g. at end-month or end-quarter). In addition, consideration should be given to moving away from the federal funds rate as the operating target (since it is currently transacted only between a narrow group of participants) and adopt instead a broader measure of the cost of overnight borrowing. Finally, there is a case to return to a point target for the chosen policy rate, rather than continuing with the current target range.

Authorities’ Views

39. There was an expectation among monetary policy officials that, while the economy would slow, the expansion of economic activity would continue, and labor market conditions would remain strong. Inflation outcomes had been softer-than-expected over the past few months. Nonetheless, officials were confident that inflation would, over the next few years, still rise back to the Fed’s longer-run objective of 2 percent as labor markets remained tight and wage pressures were allowed to build. There was little to suggest that the recent fall in inflation away from the 2 percent reached for much of 2018 was anything other than a transitory phenomenon and there was little evidence of more persistent headwinds to PCE inflation. Nonetheless, the Fed was attuned to the possibility that low inflation expectations could be exerting downward pressure on inflation. Alternatively, there could possibly be more slack in the labor market than was suggested by usual measures. Officials did not want to pre-empt the broad-based assessment of monetary policy strategy, tools, and communications that was already underway but did expect the findings of this review to be considered by the FOMC in the latter part of this year and could lead to evolutionary changes in the framework. On the operating framework, the Federal Reserve intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the Federal Reserve’s administered rates and in which active management of the supply of reserves is not required. Beyond these general principles, officials saw little urgency to articulate more details about how the operating framework may evolve over the medium-term.

A More Open, Stable, and Transparent, Rules-Based International System for Trade and Investment

40. Trade policy uncertainties remain high, creating negative consequences for the U.S. and for global activity. Tariffs remain in place on steel, aluminum, and certain household appliances; tariffs on US$200 billion of imports from China have been increased to 25 percent (with a potential for a further expansion of tariffs); and the USMCA has not been approved by national legislatures. The U.S., Mexico and Canada Agreement (USMCA) could, if approved, alleviate uncertainty and provide some modernization in the areas of services, e-commerce, and data transparency. In addition, the recent elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico (as well as the elimination of the Canadian and Mexican retaliatory tariffs) was a positive development. Nonetheless, the USMCA still has important shortcomings including more stringent rules of origin requirements and a provision that discourages USMCA members from negotiating free-trade agreements with non-market economies. Finally, a decision on whether to raise tariffs on imported auto vehicles and parts—including those from North American trading partners—under Section 232 of the 1962 Trade Expansion Act has been deferred for 180 days.

41. On May 23, the Department of Commerce issued a notice of proposed rulemaking that would allow the imposition of countervailing duties on countries that are viewed as subsidizing their own exporters by undervaluing their currencies relative to the U.S. dollar. If the proposal is adopted, it would raise significant questions of how to judge the degree of such undervaluation and the consistency of the proposal with the U.S. international obligations, including at the WTO. Further, it could encourage trading partners to either respond with retaliatory trade barriers or to themselves regard currency undervaluation as a subsidy and may have implications for a country’s conduct of monetary policy.

42. On May 30 the administration invoked the International Emergency Economic Powers Act to impose a 5 percent tariff on all goods imported from Mexico, starting on June 10, unless Mexico takes effective actions to curb illegal immigration across the Southern Border. Should the U.S. deem Mexico’s actions against illegal immigration are insufficient, the tariffs would, on the first day of each subsequent month, be progressively raised in 5 percent increments until they reach 25 percent on October 1.

43. As highlighted in the April 2019 World Economic Outlook, trade tensions and tariff hikes have had negative outward spillovers, contributing to the deceleration in the global economic expansion in the second half of 2018. Further the October 2018 World Economic Outlook illustrates that higher import tariffs imposed by the United States, along with retaliatory measures by trading partners, has the potential to inflict significant costs on the global economy, particularly if such policy choices were to feed into confidence and tighten financial conditions.

44. For the global economy to function well, it needs to be able to rely on a more open, more stable, and more transparent, rules-based international trade system. Rising import tariffs and other steps taken by the administration are undermining the global trading system, increasing restrictions on trade in goods and services, and catalyzing a cycle of retaliatory trade responses. The U.S. and its trading partners should work constructively to better address distortions in the trading system that are partly rooted in the system’s inability to adapt to long-term changes in the international environment. It is especially important that the trade tensions between the U.S. and China—which represent a threat to the global outlook and create important negative spillovers to other countries—are quickly resolved through a comprehensive agreement that strengthens the international system (not through a managed trade deal that targets a compression in the bilateral U.S.-China trade deficit). As highlighted in the April 2019 World Economic Outlook, tariff measures are likely to be ineffective at containing bilateral trade deficits and will be damaging to the U.S. and to global macroeconomic outturns. Instead, the U.S. external imbalance will need to be addressed through fiscal adjustment and supply side reforms that improve productivity and competitiveness.

45. The U.S. would gain by working with international partners to strengthen the rules-based, multilateral trading system. This should include advancing trade negotiations in areas such as e-commerce and services and ensuring the continued enforceability of existing WTO commitments through a well-functioning WTO dispute settlement system.

46. Finally, greater attention needs to be paid to the welfare of those workers dislocated by the ongoing reshaping of the U.S. economy by technology and trade. This will require intensifying policy efforts including through greater public investments in training and education, temporary income support, and job search assistance.

Authorities’ Views

47. The administration recognized the benefits of international trade and investment, while pointing to the need for reforms to address the shortcomings of the WTO and other trade rules. They viewed China as pursuing policies that were unfair and discriminatory, creating burdens on U.S. companies, some of which were not adequately remedied through the WTO. Key concerns include pressure on U.S. companies to transfer technology, weak protection and enforcement of intellectual property rights, sponsoring cyber theft and intrusion into the commercial networks of U.S. companies for commercial purposes, tariffs and non-tariff barriers, including subsidy practices that lead to excess global capacity, and services and agricultural market access. The U.S. is seeking to end such practices and to achieve a more fair, balanced, and reciprocal trading arrangement with China. The administration noted one of its top priorities is to obtain Congressional approval of the USMCA. The administration is confident that approval of the USMCA will modernize and rebalance America’s trade relationship with Canada and Mexico, boost economic growth, and create jobs for American workers, particularly in manufacturing. On the question of considering currency undervaluation as a countervailable subsidy, this evaluation would be one component of a case initiated by the International Trade Administration in the U.S. Department of Commerce to provide relief to U.S. industries from the harmful effects of unfairly traded imports. The U.S. Treasury would be consulted regarding the analysis of undervaluation.

Governance and Transparency

48. According to the latest (2016) Financial Action Task Force (FATF) Mutual Evaluation Report of the United States (MER), the U.S. is substantially effective at investigating and prosecuting money laundering and cooperating with other jurisdictions over corruption proceeds in the U.S. The authorities understand that the U.S. is often a desirable destination for the proceeds of foreign predicate offenses, including corruption.1 They have also identified that complex legal structures are often used to hide ownership and control of illegal proceeds and that the high-end real estate sector may be vulnerable to money laundering abuse. To help mitigate these circumstances in relation to foreign corruption, the Department of Justice has a dedicated Kleptocracy Asset Recovery Initiative which focuses on recovering the proceeds of foreign official corruption. Since 2010, it has restrained US$2.8 billion in assets, and repatriated over US$150 million to countries affected by corruption.

49. Since the MER was published, the U.S. has continued to take non-prosecutorial efforts to combat corruption. In December 2017, the United States issued an Executive Order declaring a national emergency with respect to, amongst other things, corruption around the world and providing for the imposition of sanctions on actors engaged in corrupt activities which have resulted in 66 corruption-related designations (as of May 16, 2019). The U.S. Treasury has issued numerous corruption-related advisories to inform financial institutions, governments, and non-governmental organizations about the ways in which corrupt officials and their facilitators abuse the international financial system.2

50. Nonetheless, the U.S needs to address serious weaknesses identified by the FATF in entity transparency and the content and coverage of preventive measures that may make it easier for foreign corrupt officials to hide their proceeds in the U.S. More needs to be done to address the following weaknesses, some of which were identified by the FATF:

  • The measures currently in place to prevent the abuse of companies are inadequate and the lack of readily accessible beneficial ownership information about companies means that the U.S. authorities are unlikely to undertake a resource-intensive investigation on behalf of a foreign counterpart unless the case is of a high priority. Fundamental improvements are needed to strengthen the legal framework to facilitate timely access to beneficial ownership information and thus speed up investigations and help prevent the abuse of legal entities for money laundering purposes.

  • The U.S. only complies partially with preventive requirements for regulated firms regarding the identification and verification of beneficial ownership for customers and politically exposed persons (PEPs).3 However, in practice, many banks do apply requirements regarding PEPs more broadly than they are obliged to do, due in large part to supervisory expectations regarding PEPs set out by federal banking supervisors. Beneficial ownership information is not collected in all cases and the definition of beneficial ownership does not comply with the FATF standard. Nonetheless, in 2018, the U.S. partially addressed its deficiency regarding beneficial ownership when it brought in a new requirement for major regulated firms (such as banks, securities firms, and futures firms) to obtain beneficial ownership information that the authorities believe meets the FATF definition when corporations, but not other customer types, open new accounts.

  • Major improvements are needed to make lawyers, accountants, and trust and company service providers subject to customer due diligence and suspicious transaction reporting obligations even though some ML/TF risks faced by lawyers and accountants may be partially mitigated by cash reporting obligations, as well as by strong professional entry and continuing ethical requirements

  • Action is also needed to address money laundering risks in high-end real estate, where real-estate agents are not subject to comprehensive AML/CFT requirements and where non-bank mortgage lenders and originators have limited awareness of obligations, especially with regard to politically exposed persons. The use of Geographic Targeting Orders issued by Treasury’s Financial Crimes and Enforcement Network (to collect information for high-end purchases by legal entities without financing) could be used to inform further action to address these risks.

Authorities’ Views

51. The authorities recognized the importance of addressing the issue of corruption from all angles and welcomed the opportunity to discuss efforts to prevent foreign public officials from concealing the proceeds of corruption in the U.S. economy. They emphasized U.S. government efforts, including prosecutorial efforts as well as the use of sanctions designations and corruption-related advisories to communicate corruption-related risks and obligations to financial institutions, governments and non-governmental organizations. They acknowledged shortcomings regarding the collection of beneficial ownership information at the time of company formation and expressed their commitment to working with Congress on potential legislative solutions to address this gap.

Staff Appraisal

52. The U.S. economy is in the longest expansion in recorded history. Unemployment is at levels not seen since the late 1960s, real wages are rising, and inflationary pressures remain subdued. Economic activity, while still growing above potential, is expected to slow to around 2.6 percent this year and 1.9 percent in 2020.

53. Despite these positive macroeconomic outcomes, the benefits from this decade-long expansion have not been shared as widely as they could. A broader set of social indicators shows a troubling picture. Average life expectancy is falling, income and wealth polarization have increased, poverty has fallen but remains higher than in other advanced economies, social mobility has steadily eroded, and education and health outcomes are discouraging.

54. The financial system appears healthy but medium-term risks to financial stability are rising. More accommodative guidance by global central banks has supported a broad-based increase in asset prices and a compression in the market pricing of volatility. At the same time, vulnerabilities in leveraged corporates and, potentially, in the nonbank system are elevated by historical standards. There has been little institutional response to counter these growing risks.

55. An abrupt reversal of the recent supportive financial market conditions represents a material downside risk to the U.S., with spillover implications for other economies. A sudden tightening of financial conditions could interact with high levels of corporate and public debt, creating a feedback loop between financial conditions and real activity, with negative implications for financial stability. This would undoubtedly have negative outward spillovers for non-U.S. corporates, sovereigns and financial institutions, particularly those with significant leverage or rollover needs in U.S. dollars.

56. The U.S. public debt is on an unsustainable path. Policy adjustments are needed to lower the fiscal deficit and put the public debt on a gradual downward path over the medium-term. There are a range of possible policy options, but any successful package will likely require steps to address the expected increases in entitlement spending on health and social security, to raise indirect taxes, and to institute a federal carbon tax.

57. Further increases in the federal funds rate should be deferred until there are greater signs of wage or price inflation than are currently evident. Faced with falling inflation, anchored inflation expectations, a flat trade-off between inflation and slack, and continued uncertainties around the U.S. and global outlook, monetary policy has appropriately paused. This gives policymakers time to gauge the balance of risks to both inflation and employment outcomes and to build a clearer picture of whether further adjustments in the federal funds rate are warranted.

58. Providing greater clarity, and a more holistic picture, of the expected evolution of the operating framework for monetary policy would be valuable. Operational changes could involve introducing a standing repo facility (to help cap spikes in money market rates); moving away from the federal funds rate as the operating target; and returning to a point target for the policy rate (rather than the current target range).

59. For the global economy to function well, it needs to be able to rely on a more open, more stable, and more transparent, rules-based international trade system. The U.S. and its trading partners should work constructively to better address distortions in the trading system that are partly rooted in the system’s inability to adapt to long-term changes in the international environment. It is especially important that the trade tensions between the U.S. and China—which represent a threat to the global outlook and create important negative spillovers to other countries—are quickly resolved through a comprehensive agreement that strengthens the international system.

60. The external position is judged to be moderately weaker than implied by medium-term fundamentals and desirable policies. The current account deficit is expected to rise modestly over the medium-term, moving it further away from the estimated current account norm. The real effective exchange rate remains somewhat overvalued. As highlighted in the April 2019 World Economic Outlook, tariff measures are likely to be ineffective at containing bilateral trade deficits and will be damaging to the U.S. and to global macroeconomic outturns. Instead, the U.S. external imbalance will need to be addressed through fiscal adjustment and supply side reforms that improve productivity and competitiveness.

61. The U.S. should address serious weaknesses in entity transparency and the content and coverage of preventive measures that may make it easier for foreign corrupt officials to hide their proceeds in the U.S. The U.S. needs to do more to ensure law enforcement agencies have timely access to beneficial ownership information (to speed up investigations and help prevent the abuse of legal entities for money laundering purposes). Requirements should be strengthened for regulated firms regarding the identification and verification of beneficial ownership for customers and politically exposed persons. Improvements are needed to make lawyers, accountants, and trust and company service providers subject to customer due diligence and suspicious transaction reporting obligations. Finally, there is a need to address money laundering risks in high-end real estate (where real-estate agents are not subject to comprehensive AML/CFT requirements and where non-bank mortgage lenders and originators have limited awareness of obligations, especially with regard to politically exposed persons).

62. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

United States: Selected Economic Indicators

(Percentage change from previous period, unless otherwise indicated)

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Sources: BEA; BLS; FRB; Haver Analytics; and IMF staff estimates.

Contribution to real GDP growth, percentage points.

Includes staff’s adjustments for one-off items, including costs of financial sector support.

Table 2.

United States: Balance of Payments

(Annual percent change unless otherwise indicated)

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Sources: BEA; FRB; Haver Analytics; and IMF staff estimates.
Table 3.

United States: Federal and General Government Finances

(Percent of GDP)

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Sources: Congressional Budget Office; Office of Management and Budget; and IMF staff estimates.Note: Fiscal projections are based on the June 2017 Congressional Budget Office baseline adjusted for the IMF staff’s policy and macroeconomic assumptions. Projections incorporate the effects of tax reform (Tax Cuts and Jobs Act, signed into law end-2017) as

Includes staff’s adjustments for one-off items, including costs of financial sector support.

Excludes net interest.

Excludes net interest, effects of economic cycle, and costs of financial sector support.

Percent of potential GDP.

Table 4.

United States: Core Financial Soundness Indicators for Deposit Takers

(Percent unless stated otherwise)

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Note: 2018 data is the 2018Q3 value.

Appendix I. External Sector Assessment

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Appendix II. Risk Assessment Matrix1

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Appendix III. Public Debt Sustainability Analysis

The U.S. budget deficit started rising in 2016, following a decline during 2010–15, and the U.S. public debt-to-GDP ratio is on an unsustainable path. Under the baseline scenario, public debt is projected to rise over the medium term, as age-related spending pressures on entitlement programs assert themselves and interest rates normalize. In addition, tax cuts and discretionary spending increases enacted since late-2017 are adding pressure on U.S. public finances. Gross financing needs are large, albeit manageable given the global reserve currency status of the U.S. dollar. A credible medium-term fiscal adjustment featuring reprioritization of budget programs and revenue-gaining tax reform is needed to put public debt on a downward path.

1. Background. Significant fiscal consolidation measures were legislated in 2011–13 to tackle the high public debt ratio, which had doubled at the federal government level since 2007 due to the Great Recession and associated fiscal measures. However, the Bipartisan Budget Acts of 2013, 2015, and 2018 reversed some of the cuts scheduled to take place since FY2014, with only partial offsets from savings generated through mandatory spending cuts in later years. In addition, the Tax Act of 2015 and the Tax Cuts and Jobs Act of 2017, extended several tax cuts while introducing new ones. As a result, sustained fiscal deficits are projected for the medium to long term.

2. Baseline. The staff’s baseline is based on current laws. Under this baseline, public debt is projected to continue rising as age-related spending pressures on entitlement programs assert themselves and interest rates normalize. Federal debt held by the public is projected to increase from about 76 percent of GDP in 2018 to around 87 percent of GDP in 2028, with general government gross debt rising from about 106 percent of GDP to 111 percent of GDP during this period.

3. Adjustment scenario. The 2018 general government primary deficit was 2.6 percent of GDP. In staff’s view, gradually raising the primary general government surplus to around 1 percent of GDP (1¾ percent of GDP for the federal government) would put the debt-to-GDP ratio firmly on a downward path over the medium term. The target primary surplus would have to be larger to bring the debt ratio closer to pre-crisis levels by 2030.


Federal Debt Held by the Public

(percent of GDP, fiscal year)

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

4. Debt servicing costs. The fiscal projections benefit from the current favorable interest rate-growth differential. Reflecting accommodative monetary policy and the safe-haven status of the United States, real interest rates have fallen well below GDP growth. Under staff’s baseline, the effective interest rate is projected to rise gradually from the current level of 2.8 percent and reach 3.3 percent by 2027 (which is somewhat above its 2008–16 average level). Thus, real interest rates will become a substantial debt-creating flow over the medium-term.

5. Realism. Baseline economic assumptions and fiscal projections are generally within the error band observed for all countries. The projected modest fiscal adjustment is realistic—well within the median range of consolidation episodes observed across countries in 1990–2011.

6. Stress tests. The public debt dynamics are highly sensitive to growth and interest rate assumptions, primarily reflecting the fact that the U.S. public debt ratio already exceeds 100 percent of GDP. An increase of 200 basis points in the sovereign risk premium would raise the public debt ratio to about 120 percent of GDP by 2027, about 10 percentage points of GDP above the baseline. Similarly, were real GDP growth to be one standard deviation below the baseline, the public debt ratio would increase by about 10 percentage points above the baseline. A scenario involving a 1 percentage point of GDP larger fiscal deficit over the next two years would increase public debt ratio by about 5 percentage points above the baseline by 2027. A combined macro-fiscal shock could raise the public debt ratio to as high as 130 percent of GDP by 2027. An exchange rate shock does not have implications for debt sustainability in the United States given that all debt is denominated in local currency and the reserve currency status of the dollar.

7. Mitigating factors. The depth and liquidity of the U.S. Treasury market as well as its safe-haven status represent a mitigating factor for the high external and gross financing requirements.

Appendix III. Figure 1.
Appendix III. Figure 1.

United States: Public DSA–Risk Assessment

Citation: IMF Staff Country Reports 2019, 174; 10.5089/9781498320993.002.A001

Source: IMF staff1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for the public debt held by non-residents4/ An average over the last 3 months, 21-Feb-19 through 22-May-19
Appendix III. Figure 2.